Beyond the Cost of Price Adjustment: Investments in Pricing Capital

Emory University Working Paper Series No. 2005-12

37 Pages Posted: 16 May 2005

See all articles by Mark Zbaracki

Mark Zbaracki

University of Western Ontario - General Management Area Group

Mark E. Bergen

University of Minnesota - Carlson School of Management

Shantanu Dutta

University of Southern California - Marshall School of Business

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Mark Ritson

London Business School

Date Written: June 2002

Abstract

The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms' price-setting activities as "producing" prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these "pricing" production processes. We coin the term "pricing capital" for these investments, and suggest that they can improve the efficiency of the "pricing production" activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level "pricing capital" has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the "pricing capital" to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, "pricing capital" introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital.

Keywords: Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Price Rigidity, Sticky Prices, Rigid Prices, Micro-foundations, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost

JEL Classification: E31, E12, D21, D4, L11, L16, L22

Suggested Citation

Zbaracki, Mark and Bergen, Mark E. and Dutta, Shantanu and Levy, Daniel and Ritson, Mark, Beyond the Cost of Price Adjustment: Investments in Pricing Capital (June 2002). Emory University Working Paper Series No. 2005-12, Available at SSRN: https://ssrn.com/abstract=723743 or http://dx.doi.org/10.2139/ssrn.723743

Mark Zbaracki

University of Western Ontario - General Management Area Group ( email )

London, Ontario
Canada

Mark E. Bergen

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1821 (Phone)

Shantanu Dutta

University of Southern California - Marshall School of Business ( email )

Hoffman Hall 701
Los Angeles, CA 90089-1427
United States
213-740-5038 (Phone)
213-740-7828 (Fax)

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)

HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

1602 Fishburne Drive, Suite 306
Rich Building
Atlanta, GA 30322-0001
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Wilfrid Laurier University
75 University Ave W.
Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

Mark Ritson

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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